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Which of following statement is false?

A.

When comparing investment it is best not to rely solely on quoted rates.

B.

Compounding typically leads to differences between quoted and effective rates.

C.

The APR on la loan with monthly payments is less than the annual interest you actually pay.

D.

The Apr is the interest rate per period multiplied by the number of periods per year.

E.

With monthly compounding, the APR will be larger than the effective annual rate.

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Reid Wolff
Reid WolffLv2
28 Sep 2019

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QUESTION 1 The recorded session provides a good overview on calculating this problem. Use the "A Number of Useful Financial Spreadsheets" to find a sample template you can use to work this problem. The problem you will answer has the following fact pattern: Fred, the accountant for XYZ Company forgot to pay a credit card payment that was due in the amount of $575. He noticed it exactly 1 month later when he was making the monthly payment. The late fee charged as $35. If you consider the $35 late fee a charge for the month of interest on the $575, what APR did the company pay because of Fred's mistake? Use monthly compounding and carry your answer two decimal points. (76.25% would be entered 76.25) Question 2 What would the Effective Annual Rate paid by the company based on th $35 late fee? Use monthly compounding and carry your answer two decimal points. (76.25% would be entered 76.25) Question 3 Your insurance premium for your autos are due and you have two options: Option 1 - Pay the full amount of $1,200 now. Option 2 - Pay $205 now and 5 monthly payments of $205 with the first payment starting in a month. What is the APR you are actually paying if you choose the installment Option 2? Use monthly compounding and carry your answer two decimal points. (76.25% would be entered 76.25) Question 4 What would the Effective Annual Rate be if you pursued the installment option? Use monthly compounding and carry your answer two decimal points. (76.25% would be entered 76.25)

Use a calculator to solve all quantitative problems, and be sure to show calculator format!!!

(n, I, pmt, pv, fv CFo,I,CF1, CF2….)

8) Three years ago a company had sales of $300,000. Now sales are $1,000,000. At what rate have

sales been growing?

9) Define each of the following:

a) Quoted rate (APR)

b) Periodic rate

c) Effective annual rate (EAR)

10) What are the following Effective Annual Rates (EAR) for 12%:

a) Compounded semiannually?

b) Compounded quarterly?

c) Compounded daily?

11) What would the value of $500 be after 4 years, assuming a return of 8% per year:

a) with semiannual compounding?

b) with quarterly compounding?

12)A. You plan to invest in a preferred stock issue that pays a $60 dividend at the end of each year. Based

on market conditions, you want to get a 5% return. What are you willing to pay for this security?

12)A You want to buy a car today!! The used car you are looking at costs $21,500. The car dealer will

charge you 5% interest on the three year car loan you need. You will be borrowing the whole $21,500. What will your car payment be, if you will make monthly payments?

13. Your company has invested $2500 in a vending machine today. You expect the machine to last 10 years and to produce the following after tax cash flows per year:

Year 1 $100

Year2 $250

Year 3 $250

Year 4 $300

Year 5 $300

Year 6 $300

Year 7 $300

Year 8 $300

Year 9 $350

Year 10 $350

If you have a required return on your investment of 7%, did you pay too much for the vending machine?

Hand-to-Mouth is currently cash-constrained, and must make a decision about whether to delay paying one of its suppliers, or taking out a loan. They owe the supplier $13,000, but the supplier will give them a 2% discount if they pay by today (when the discount period expires). That is, they can either pay $12,740 today, or $13,000 in one month when the net invoice is due. Because Hand-Mouth does not have the $12,740 today, or $13,000 in one month when the net invoice is due. Because Hand-to-Mouth does not have the $12,740 in cash right now, it is considering three options:

Alternative A: Forgo the discount on its trade credit agreement, wait and pay the full $13,000 in one month.

Alternative B: Borrow the money from Bank A, which has offered to lend the firm $12,740 for one month at an APR (compounded monthly) of 11.7%. The bank will require a (no-interest) compensating balance of 4.6% of the face value of the loan and will charge a $90 loan origination fee, which means Hand-to-Mouth must borrow even more than the $12,740.

Alternative C: Borrow the money from Bank B, which has offered to lend the firm $12,740 for one month at an APR of 14.9% (compounded monthly). The loan has a 1.1% loan origination fee.

Alternative A: The effective annual cost is ______________________%. (Round to two decemial places)

Alternative B: The effective annual rate is _______________%. (Round to two decimal places)

Alternative C: The effective annual rate is ______________%. (Round to two decimal places)

(Select the best choice below):

A. Alternative B, with the lowest effective annual rate, is the best option for Hand-to-Mouth

B. Alternative C, with the lowest effective annual rate, is the best option for Hand-to-Mouth

C. Alternative A, with the lowest effective annual rate, is the best option for Hand-to-Mouth

D. All the alternatives are equivalent.

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